fraud risk management program

In 2020, the Federal Trade Commission (FTC) received over 2 million fraud reports that resulted in losses of over $3.3 billion. Fraudsters can run a scam from the onboarding process onward by obtaining and exploiting individual means of verification, including street addresses and passwords.

An essential part of any fraud risk management program is an onboarding process that verifies that people are who they say they are. This can prevent fraudsters from entering your systems in the first place.

Preventing fraud risk with ID and business verification

Identity theft is currently among the most common fraudulent activities and is continuing to expand. The increase in identity theft is partly due to the significant data breaches in recent years, which have given fraudsters access to vast amounts of personally identifiable information (PII).

Using Know Your Customer (KYC) verification methods during the onboarding process helps prevent fraudsters from entering your system. The ID verification process flags anomalies in identity like out-of-date or mismatched information.

Verification methods using biometric markers can cross-reference multiple data points by combining ID document verification with distinguishing biological traits. Mobile Network Operator (MNO) phone data like geolocation, usage and billing information can also be cross-referenced with other identity data points.

The most common types of online fraud

Understanding the techniques used by fraudsters is one of the best ways you can protect your business. Here are some of the most common types of online fraud to consider as part of your overall fraud risk management program.

Synthetic identity fraud

Synthetic identity fraud (SIF) is the most common type of ID theft where fake and real information is combined to create an identity for malicious activity. Typically, the real information included in this ID theft is stolen. SIF currently accounts for about 80% of all ID fraud, so spotting fake identities is a robust defense you can give your business without negatively impacting the customer onboarding experience.

SIF is designed to bypass conventional validation and authentication methods. And the increase of large-scale customer data leaks has given fraudsters plenty of personal data to exploit.

Account origination and takeover fraud

Account origination fraud and account takeover fraud (ATO) are other types of identity theft that happen when a fraudster gains access to an individual’s account to make fraudulent transactions or use their personal information elsewhere to create accounts.

ATO is complicated to pinpoint because legitimate credentials are used to access the accounts. But companies can lose millions of dollars by not prioritizing a solution to fraud risk or uncovering ATO after the damage has already been done.

Card-not-present and chargeback fraud

Card-not-present (CNP) fraud is a general term for fraudulent transactions where a cardholder doesn’t present a card in person at the time of purchase. CNP generally occurs through mobile payments or online, which makes them difficult to prevent and detect.

Chargebacks are a type of CNP fraud that happens when someone orders products or services and then requests a chargeback from the issuing bank instead of the merchant. Businesses that use 3D Secure, V.2 (3DS2), a multifactor authentication protocol, are now often able to shift the liability of a chargeback to the issuer.

In addition to authentication methods like 3DS2, implementing an enterprise-wide strategic program can help your company effectively manage fraud risk across all transaction channels.

Account takeover fraud - systems and technologies

What is a fraud risk management program?

A fraud risk management program gives your business a framework for identifying, assessing, preventing, mitigating, monitoring and reporting fraudulent activities. Preventing fraud isn’t just about protecting revenues and bottom lines; it also minimizes reputational harm and helps build customer trust. Plus, it can reduce friction by streamlining the customer experience.

One of the main benefits of a fraud risk management program is a significantly positive impact on decreasing the overall costs of fraud for companies. Conducting risk analysis also gives businesses a greater understanding of their strengths and weaknesses and insights on how to improve their fraud risk management process.

Tips for implementing a fraud risk management program

Establishing a fraud risk management program standardizes your organization’s commitment to managing fraud risk. A comprehensive, proactive strategy can enhance your controls and communication for employees and customers regarding areas of exposure.

Here are some helpful tips on how to get started:

1.     Assess your company’s specific fraud risk

The first step is to perform a comprehensive fraud risk assessment. Consider the requirements associated with your particular regulatory compliance and industry standards. Also, investigate the common techniques fraudsters use against your type of business.

Armed with this assessment, you can more easily define procedures for detecting and preventing fraud. Then you can select, develop, and deploy fraud risk control activities that are specifically suited to your company’s risk tolerance.

2.     Implement a fraud awareness and training program

Ensure employees understand various fraud risks and know what to look for and how to respond.

3.     Adopt a coordinated approach to fraud reporting

An effective fraud reporting process includes a coordinated approach to investigation and corrective action. As you monitor the fraud risk management process, your team can report the results and make continuous improvements.

4.     Leverage fraud detection tools

Fraud detection tools such as Address Verification Service (AVS) and Card Verification Value (CVV) can help combat fraud from credit and debit cards. The FTC reports that most fraud stems from credit card, debit card and payment app or service payment methods. So, having fraud detection tools in place can help mitigate fraud risks.

5.     Take advantage of fraud management software

Many automated fraud management software systems use machine learning (AI) and predictive analytics. Using machine learning to authenticate transactions can allow businesses to reduce fraud by uncovering hidden correlations between people’s behavior and the likelihood of fraudulent actions.

Digital onboarding is crucial to fraud risk management

Customer onboarding is the beginning of a customer’s relationship with your business. Effective digital onboarding can make online account opening easier so you can gain genuine customers while keeping bad actors out. Companies that have optimized their onboarding process as part of their risk management program have achieved significant and sustainable advances in preventing fraud.

Adapting to the ever-changing world of digital identity requires limiting the risk of fraud while maintaining customers’ trust.